Proposed Regulations Issued on Clean Vehicles Credit under Section 30D

On March 31^st, the Treasury Department (“Treasury”) and the Internal Revenue Service (“IRS”) released proposed regulations (“Proposed Regulations”) under the Clean Vehicle Credit of Internal Revenue Code Section 30D, which provides a credit for the purchase and placing in service of certain new clean vehicles (“Section 30D Credit”). The Section 30D Credit was originally enacted in 2008 and has been amended several times. Most recently, the Inflation Reduction Act of 2022 (“IRA”) made numerous amendments to the Section 30D Credit to promote the purchase and use of new clean vehicles made with battery components manufactured in North America and critical minerals sourced from the United States or countries with which the United States has a free trade agreement. The Section 30D Credit is treated as a personal or business credit depending on the use of the vehicle.  Businesses looking to transition their fleets should also consider the availability of the Credit for Qualified Commercial Clean Vehicles under Internal Revenue Code Section 45W. 

The IRA’s most significant amendment to Section 30D is that it requires the credit to be determined based on whether the clean vehicle’s battery meets a critical minerals requirement (for a credit of $3,750) and battery component requirement (for a credit of $3,750), for a maximum credit of $7,500 per new clean vehicle. Under the IRA, the critical minerals and battery components requirements apply only after Treasury and the IRS issue proposed guidance on these requirements. The publication of the Proposed Regulations in the Federal Register, which is to occur on April 17, 2023, constitutes the issuance of such guidance. Accordingly, any vehicle placed in service on or after April 18, 2023 will have to comply with the critical minerals and battery components requirements in order for the taxpayer to claim the full Section 30D credit.

Critical Minerals Requirement

The critical minerals requirement will be met for a clean new vehicle placed in service in 2023 if at least 40 percent of the value of the critical minerals in the vehicle’s battery were extracted or processed in the United States, or in any country with which the United States has a free trade agreement, or recycled in North America. The required percentage increases annually by 10 percent until it reaches 80 percent for vehicles placed in service after 2026.

The Proposed Regulations provide a three-step process for determining the percentage of the value of the critical minerals in a battery that contribute toward meeting the critical minerals requirement:

• The first step requires a manufacturer to determine the procurement chain or chains for each critical mineral.

• The second step requires each critical mineral procurement chain to be evaluated to determine whether the critical minerals procured from the chain have been (1) extracted or processed in the United States, or in any country with which the United States has a free trade agreement in effect, or (2) recycled in North America. A critical mineral that meets this requirement is referred to as a “qualifying critical mineral”.

The Proposed Regulations provide for a “50-percent-of-value-added test” for vehicles placed in service in 2023 and 2024 (with a more stringent test expected to apply for vehicles placed in service thereafter). Accordingly, a critical mineral would meet the test for extraction, processing or recycling if:

1. 50 percent or more of the value added to the critical mineral by extraction is derived from extraction that occurred in the United States or in any country with which the United States has a free trade agreement in effect;
2. 50 percent or more of the value added to the critical mineral by processing is derived from processing that occurred in the United States or in any country with which the United States has a free trade agreement in effect; or
3. 50 percent or more the value added to the critical mineral by recycling is derived from recycling that occurred in North America.

• The third step requires calculating the percentage of the value of qualifying critical minerals contained in a battery, which is equal to (1) the total value of the qualifying critical minerals contained in the battery, divided by (2) the total value of the critical minerals contained in the battery. This percentage is then compared against the applicable percentage for the year during which the vehicle is placed in service to determine whether the vehicle satisfies the Critical Minerals Requirement.

Battery Components Requirement

The battery components requirement will be met for a clean new vehicle placed in service in 2023 if at least 50 percent of the value of the components in the vehicle’s battery were manufactured or assembled in North America. The required percentage increases to 60 percent in 2024 and 2025, 70 percent in 2026, 80 percent in 2027, 90 percent in 2028, and 100 percent after 2028.

The Proposed Regulations provide a four-step process for determining the percentage of the value of the battery components in a battery that contribute toward meeting the battery components requirement.

• The first step requires manufacturers to determine whether each battery component was manufactured or assembled in North America. Such a battery component is referred to as a “North American battery component.”
• The second step requires manufacturers to determine the incremental value for each battery component. The “incremental value” of a battery component is the value determined by subtracting from the value of that battery component the value of the manufactured or assembled battery components, if any, that are contained in that battery component. The resulting incremental value for a battery component would be attributable to North America if the battery component is a North American battery component, and the “total incremental value of North American battery components” is the sum of the incremental values of the North American battery components contained in a battery.
• The third step requires manufacturers to determine the total incremental value of the battery components contained in a battery.
• The fourth step requires manufactures to determine the qualifying battery component content, which is equal to (1) the total incremental value of North American battery components (determined in step 2), divided by (2) the total incremental value of battery components (determined in step 3). This percentage is then compared against the applicable battery components percentage for the year in which the vehicle is placed in service to determine whether the vehicle satisfies the battery components requirement.

Excluded vehicles

A vehicle is excluded from the definition of “new clean vehicle” if, in the case of a vehicle placed in service after December 31, 2023, any of the components contained in such vehicle’s battery were manufactured or assembled by a foreign entity of concern or, in the case of a vehicle placed in service after December 31, 2024, any of the critical minerals contained in such vehicle’s battery were extracted, processed, or recycled by a foreign entity of concern. Treasury and the IRS intend to issue guidance with respect to foreign entities of concern at a later date.

Takeaways

The quickly approaching April 18, 2023 effective date of the Proposed Regulations will affect manufacturers and the market for clean vehicles. Manufacturers will have to act quickly to analyze their supply chains and certify those vehicles that qualify for the Section 30 Credit or realign their supply chains for those vehicles that would otherwise qualify for the Section 30D Credit but do not meet the critical minerals and battery component requirements. Until manufacturers take these necessary steps, there will be fewer credit-eligible vehicles available on the market.

Treasury and the IRS have requested comments and requests for a public hearing by June 16, 2023 (60 days after the Proposed Regulations are published in the Federal Register).

Please contact us if you have questions regarding compliance with the requirements of the Section 30D Credit or wish to submit comments to Treasury and the IRS.